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Inflation Targets and Contracts with Uncertain Central Banker Preferences

Roel Beetsma and Henrik Jensen ()

Journal of Money, Credit and Banking, 1998, vol. 30, issue 3, 384-403

Abstract: Within a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker's preferences. The optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks. However, variability due to shocks is enhanced by uncertain central banker preferences. Quadratic contracts are shown to overcome this problem partly, but the advantages of delegation may still be dominated by the 'excess variability' due to shocks. Hence, the credibility-stabilization tradeoff is restored.

Date: 1998
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Working Paper: Inflation Targets and Contracts with Uncertain Central Banker Preferences (1997) Downloads
Working Paper: Inflation targets and contracts with uncertain central banker preferences (1996) Downloads
Working Paper: Inflation targets and contracts with uncertain central banker preferences (1996) Downloads
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